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Monetary policy under financial uncertainty

  • Williams, Noah

Monetary policy may play a substantial role in mitigating the effects of financial crises. In this paper, I suppose that the economy occasionally but infrequently experiences crises, where financial variables affect the broader economy. I analyze optimal monetary policy under such financial uncertainty, where policymakers recognize the possibility of crises. Optimal monetary policy is affected during the crisis and in normal times, as policymakers guard against the possibility of crises. In the estimated model this effect is quite small. Optimal policy does change substantially during a crisis, but uncertainty about crises has relatively little effect.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304393212000736
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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 59 (2012)
Issue (Month): 5 ()
Pages: 449-465

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Handle: RePEc:eee:moneco:v:59:y:2012:i:5:p:449-465
DOI: 10.1016/j.jmoneco.2012.05.006
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  5. Svensson, Lars E O & Williams, Noah, 2007. "Monetary Policy with Model Uncertainty: Distribution Forecast Targeting," CEPR Discussion Papers 6331, C.E.P.R. Discussion Papers.
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  18. Eijffinger, Sylvester C W & Schaling, Eric & Tesfaselassie, Mewael F., 2006. "Learning About the Term Structure and Optimal Rules for Inflation Targeting," CEPR Discussion Papers 5896, C.E.P.R. Discussion Papers.
  19. Ellison, Martin & Valla, Natacha, 2000. "Learning, uncertainty and central bank activism in an economy with strategic interactions," Working Paper Series 0028, European Central Bank.
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  23. John Taylor & John Williams, 2008. "Further Results on a Black Swan in the Money Market," Discussion Papers 07-046, Stanford Institute for Economic Policy Research.
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